When an economy is hit by a shock—whether a war, or a pandemic—it can adjust in two broad ways: through prices or through administrative controls imposed by the State. Market economies rely primarily on prices. Centrally planned systems depend on bureaucratic allocation. The distinction matters because prices allow millions of households and firms to adjust voluntarily, whereas controls require the State to decide who gets what, and at what price. The current disruptions in global energy markets offer a useful illustration of why this difference matters.
Consider a simple example. Suppose an economy normally consumes 100 units of fuel, but a global disruption reduces available supply to 80. Since supply cannot quickly increase, demand must fall to match it. This can happen in only two ways: either the State forces demand down through rationing and controls, or prices rise and people voluntarily reduce consumption until demand matches supply.
The second mechanism is often far more efficient and less disruptive. Let’s understand why.
First, prices perform two critical functions: they convey information and shape incentives. In many ways, the market is like a giant opinion poll—except people back their views with money. Prices aggregate the decisions of millions of consumers, businesses, traders, and investors into a single signal about scarcity or abundance.
When fuel prices rise people respond by driving less, postponing discretionary travel, or shifting to public transport, while businesses cut wasteful energy use or seek alternatives. Producers receive the opposite signal: higher prices encourage them to increase supply, reroute shipments, or find substitutes.
The alternative is for the State to make these decisions. But this raises difficult questions. If cooking gas becomes scarce, should priority go to households or restaurants? Small eateries or luxury hotels? Should fertiliser subsidies go equally to all farmers or mainly to small farmers?
There are no easy answers because no State can fully understand the preferences of millions of households and businesses. Prices solve this coordination problem more effectively by allowing people to adjust their own behaviour as conditions change. This preserves economic freedom and ensures that decisions about what to consume, conserve, or prioritise are made by those directly affected, rather than by a central authority with limited information.
Secondly, State interventions often create unintended consequences. Export bans on agricultural products can depress farm prices and discourage production, while restrictions on gold imports can lead to shortages, black markets, and smuggling. Artificially suppressing prices may feel comforting initially, but the costs eventually appear elsewhere, often through higher taxpayer burden.
Since the West Asia war began, India’s state-owned oil companies have incurred losses of around Rs 1 lakh crore as fuel prices were kept largely unchanged. In effect, consumers face a trade-off: either reduce fuel consumption today in response to higher prices or pay more than Rs 1 lakh crore in taxes at a future date. Most countries have raised fuel prices since the war started including Malaysia, Pakistan, and Philippines where prices have gone up by 50%. India, in contrast, has adjusted the least, allowing fuel prices to go up by only 3%.
Finally, repeated State intervention can create uncertainty because people stop responding to market signals and start trying to anticipate State actions instead. Businesses delay investment decisions because they do not know what new controls, or bans may appear next. This weakens confidence in the broader policy environment.
Over time, mature market economies have learned to trust prices. After Russia invaded Ukraine in 2022, Europe allowed energy prices to rise, which encouraged conservation, reduced demand, and attracted LNG supplies from around the world, helping avoid a deeper shortage. The US has followed a similar approach during the current West Asia conflict. Despite being largely self-sufficient in oil, gasoline prices have risen by about 45 per cent, allowing the market to allocate scarce fuel more efficiently.
This adjustment mechanism is also transparent and reversible. As supply conditions improve, prices naturally fall back, allowing normal economic activity to resume without the State having to dismantle complex controls and restrictions.
India itself has undergone this learning process gradually over the past few decades. There was a time when people expected the State to determine prices of petrol, steel, or airline tickets. Today, most accept that these prices move with market conditions. Yet large shocks such as wars still trigger demands for intervention. Policymakers increasingly need to recognise that markets are better at determining prices than the State. Where prices remain controlled, such as petrol and diesel, a more effective approach may be to announce future price increases in advance, giving households and firms time to adjust.
Prices are not the problem. They are how economies adjust to shocks. The role of policymakers is not to suppress these signals, but to protect the vulnerable in a targeted manner while allowing the price system to continue doing its job.
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